Introduction-Fall07

Introduction-Fall07 - Option Pricing and Financial Risk...

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Unformatted text preview: Option Pricing and Financial Risk Management FIN 4934 # " $ ! " !" " " % & ' () ( * +,# % .! " "! % *0# % ! / % 12 " " " 2 3 !& 0 3 % : & 4 6 % 2" /" 56 !- 7 8 "" 9 8 ! < < < < 2!;" 6 " 0 * = 8 ! 0 3 "% % ;" ! 2 "0 > 2 2* = 3 < " " / 1 ! 8 3 2*A6 ; # 6 ? " ! " " @+ ! / B " "3 ! "/ % ;8 C '"! " % ; # &" E " (D) " " " "3 3% / / 2 2 !" " " " " / 2 " 0 0 / ( $ # ) 2 ' 4 % & ' & 5 2 6" 4 ( ( ) @ 4 ! 2 % % $ % % ! ! " " " %% # ! "3 * * " * $ 3 ! + $ , $ ! " F 9G 240 Size of Market ($ 220 trillion) 200 180 160 140 120 100 80 60 40 20 0 Jun-98 Jun-99 Jun-00 2 # 6 ! OTC Exchange Jun-01 Jun-02 Jun-03 Jun-04 Source: Bank for International Settlements. Chart shows total principal amounts for OTC market and value of underlying assets for exchange market ? 3 8 %4 H 2 2 " 2 2 2 ! B! !C ! 3 3 % " 3% & * 9" 8 " 3% " 2 6 & # 2 2 6 &&6 B C 6 B 6 C -# I& B 0 9 - GC 2 &&6 B !% C 2 " %" 4 6" % 3% M5 ) G/ J 33 / / ) J H9K( H9K M J H9K G/ 4 # 33 / * & "3 B # 6C B 'E# 6LC B 'E# 6LC = * *3 %1 ) 2 2 2 H9K $% $% H9K ( H9K & )< '" ( * 3% C * 3% C 3% B ! B ! ) 5 *" * *" *6 3 3 % 6 %" " % 5 6 *" 9 !6 0 9 !6 0 6 &&6 B C 6 B 6 C " %" 6 2 @ & * 3 * 3% & 3% F 6 • Hedgers • Speculators • Arbitrageurs 2% 2 Some of the largest trading losses in derivatives have occurred because individuals who had a mandate to be hedgers or arbitrageurs switched to being speculators ? ; 6" * H9 * KF K @/ ) 3%3 % " % " %M " " " # / * $" K/ 2 % ! N # 9 ; 4 0,0 00 V a lu e o f H o ld in g ($) 3 5,0 00 N o H edg ing 3 0,0 00 H edg ing 2 5,0 00 2 0,0 00 20 25 30 S to ck P ri ce ($) 35 40 7 9 % % 4* 6 6 .70 .50./ 000 12 2 3 ./0 /5 - 6" 4 .4 ; " 8 " "! " ! "3 / %" & &# & '2 " " &# & 2 & 4 9: # 8 8 "2 " ' ; ( 8 % $ > ? 8 : + .<00 +& .= , +& .= , & '+ .750 8+ & ./ , + .500 6 , 3%& , , + .=70 , ) & % & " 8 + .=50 , + .40 , ( + .@00 + A& .=2 , '+ & .4 , &+ .B0 , +& .= , +& .4 , ?' 3%' $ , ) ) 5 *H 4 C ! $ & & '& ) ' @ 9 & $ ) 8 $ ? & & 1 ' ' ' F ' $& ' ' & & 3 ? ' ) C 4" A03 10 ...
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